What makes a successful bankruptcy? USU student 's research sheds light on the best ways out of a financial hole
Picture this real-life scenario: A Utah resident is $88,667 in debt and has just filed for Chapter 13 bankruptcy. The individual has been working in his or her current job for five years; has three kids; and the household has two income earners to bring in $3,000 a month. After all expenses are paid, and there is $700 left over each month. The $700 is often used on emergencies such as fixing a broken washing machine, and paying medical bills.
According to Merriam Webster's Collegiate Dictionary, bankruptcy occurs when a person is reduced to a state of financial ruin. When a person files for bankruptcy, it works to prevent the collections of debt while finances get reorganized.
Under federal bankruptcy code, Chapter 13 bankruptcy involves the stipulation that about 75 percent of the debt must be paid back over three to five years. For the above scenario it is easy to see the difficulty of paying back the debt on the scarce $700 per month. This situation leaves the debtor with no opportunity for putting money into savings, and leaves a bad credit record for 10 years. It almost seems as if the debtor is being set up to fail with no buffer zone.
Late last spring, USU student Samuel Brand presented a research project that studied this subject in depth. His Chapter 13 bankruptcy project looked at factors influencing successful vs. unsuccessful bankruptcy filings in Utah. The project was funded by an URCO grant, and began last August. URCO, which stands for undergraduate research creative opportunities, is a grant funded by the vice president for research. Brand received $500 from URCO and the college of family life matched that number.
Each year 16 to 20 independent research projects are approved and funded by USU.
"I feel that my proposed project was chosen because it is unique. Most other studies revolve around subjects such as agriculture and biology," said Brand. He said this is the first time a study like this has been conducted in Utah.
Brand was first exposed to the topic of bankruptcy in a family finance class. His professor, Dr. Jean Lown, is an expert on the subject, and she sparked his interest in the topic. She is now the adviser for his project, and does much of the tabulating of his findings. Brand said he was also intrigued by this topic because his mother filed for bankruptcy when he was a kid, and he wanted to learn more about it.
Lown recently returned from an educational bankruptcy conference. She explained that this conference focused on the recent legislative action that was passed in both the Senate and the House regarding bankruptcy. The bill requires that for anyone to file any form of bankruptcy they must do two things: 1) get financial counseling and 2) attend an educational class on money management.
Lown thinks it is going to be difficult to get the 1.4 million Americans who file bankruptcy annually to go through this process.
"This is saddling administration with a lot of expenses-- you can't get blood out of a stone," she said.
Brand said that he is striving to develop a list of criteria to identify those who are at risk of filing bankruptcy unsuccessfully. The determining factors his research is concentrating on are comprised of: total debt, age, job tenure, household size, number of earners, marital status, monthly income, monthly expenses and the number of mortgages the individual has taken out. He feels that by identifying those at risk, preventative actions can be taken, instead of trying to help when the damage has already been done.
"One of my main goals, in my research, is to get the Utah Bankruptcy Bar to pay more attention to the current situation of Utah residents who file bankrptcy, and encourage them to come up with some effective solutions to increase the success rate," said Brand.
Brand's studies are focused around both chapter 7 bankruptcy and chapter 13 bankruptcy. The main difference between the two is that in chapter 7 doesn't have to be paid back, and the debt is completely erased. Also it is more damaging to a person's credit record "shot" was how Brand put it.
Brand has found that in 1997 just over 14,000 Utahns filed bankruptcy. Lown said that Utah is "notorious" for this number. When comparing this number with population numbers, it is close to the national average, but when the high population of children vs. adults in this state is taken into consideration, the amount of adults filing bankruptcy is much higher than in other states she said.
Brand's main resource for his research is the Utah bank website. This website can only be accessed by special permission by the state and is not open to the public.
Brand has found that the most common reason for bankruptcy is going into debt to purchase a home. He also found that the age group most prone to filing bankruptcy ranges for 35 to 40. Lown thinks that bankruptcy is such a complicated subject that it is hard to pinpoint one thing that causes it.
"There are so many reason for a consumer to get into debt, and oftentimes it is a combination of different reasons," said Lown. She says ignorance, being present oriented, losing a job, and divorce are all factors that can contribute to acquiring huge amounts of debt.
"That is why studying bankruptcy is so complicated." She said that creditors are constantly bugging those who are on the verge of filing bankruptcy, and when a person gets to the point where they have no other option but to file, they are bombarded with advertisements. Lawyers make themselves readily available, and all the person has to do is call.
Brand has discovered bankruptcy cases that range $20,000 in debt, to $2 million in debt. He said that most of the extremely large sums of debt are a result of a failed small business.
Brand, a senior at USU, will graduate with a bachelor's degree in family consumer science in May. He enjoys ballroom dancing in his spare time, and has participated with the USU Ballroom Dance team. He and his wife are expecting a baby in September.
Brand said that he has thoroughly enjoyed his research project, and he feels that through his research Utah can make its current bankruptcy filing system more efficient.